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Old 10-12-2009, 05:49 PM   #21
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I agree the article was weak. But I do think there is a need for some reform in 401(k) design. I retired on a defined contribution plan, a 403(b) -- but it was actually designed to get people to retirement. Participation with a minimum 5% employee contribution was mandatory. Employer contribution has grown over time from 5% to nearly 10% of salary, and other employers do better than that. Investment management is provided through TIAA-CREF at low cost and with lots of counseling available.

I think a bit of enhancement to 401(k)s would go a long way to improving things. In addition to mandatory participation, and employer contributions based on salary rather than employee contribution, I'd like to get employers out of the 401(k) business altogether. An employee should be able to set up a plan with their provider of choice and the employer would remit to that plan provider for that employee. The employee would keep their plan when changing jobs. Competition has done wonderful things for IRAs and would do the same for 401(k)s.

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Old 10-12-2009, 05:58 PM   #22
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I think most of the problems with 401(k)s are because people are clueless about investing. The recent changes which encourage companies to give investment advice and put peoples retirement on autopilot are great steps. I believe none of the Oxy Petroleum people interviewed were around for these changes.

I'd love to see new employee automatically enrolled in 401 at least enough to take advantage of the company match or say 6%. The money placed in a target date retirement fund, and require employees to opt out of things like automatically increasing their 401K contributions after pay raises. I'd even like to see more restrictions on withdrawals from 401(K)s, or at the very least require people to eat cat food for a day before letting the take out the money

I agree with Coach, letting people keep their 401(K) when they change jobs would go a long way toward solving one of the biggest problems, people have a tendency to cash out small 401K when the change jobs. I am not sure but I suspect that is because it is confusing and somewhat of a hassle to roll the money over into a new 401K or IRA.

I am expecting nothing from Time magazine but maybe Google will help my response get more widely read.
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Old 10-12-2009, 06:33 PM   #23
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I think most of the problems with 401(k)s are because people are clueless about investing. The recent changes which encourage companies to give investment advice and put peoples retirement on autopilot are great steps. I believe none of the Oxy Petroleum people interviewed were around for these changes.
I also think part of the problem with defined contribution plans is that the time when contributions will produce the most retirement wealth -- when you're in your 20s and 30s -- is also the time when people aren't thinking about retirement and when people have the lowest earning power to set aside part of their pay.

I may not be able to FIRE as soon as I hoped after the market meltdown, but I'll still be okay relative to most folks. I've been putting 10-12% of pay into my 401K since I was 23 and more than that recently. Despite the recent haircut, all the money I put in from about 1989 through the 1990s is still way ahead of the game.
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Old 10-12-2009, 07:44 PM   #24
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I would love to see many of these proposed enhancements made to 401k or other defined benefit plans. I don't think that's the direction the "reformers" who are starting these kinds of articles are leaning. They seem much more inclined to invent group plans or insurance pools or government mandates and then make their solution mandatory. I'm sure I could have done better with my 401k, but the ability to move it to my own IRA every time I changed employment has done much better than any of the defined benefit plans I was (temporarily) a member of. I wish I could have contributed more in early years, but back then dollar and percentage limits were much lower than the current rules. Seems strange to be talking about scrapping the plans because under old rules (no longer applicable) many people didn't contribute more, instead of talking about how to encourage more contributions under the new rules.

I also don't understand the "average 401k balance" numbers that show up in all these articles. Do they account for the balances rolled into IRAs? It seems like they omit those, which gives a very odd measure of the value of 401k skewed by new participants who change employers, thus making their old 401k balances vanish from measurement.
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Old 10-12-2009, 09:35 PM   #25
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I also don't understand the "average 401k balance" numbers that show up in all these articles. Do they account for the balances rolled into IRAs? It seems like they omit those, which gives a very odd measure of the value of 401k skewed by new participants who change employers, thus making their old 401k balances vanish from measurement.
Excellent point, not thought about that. First thing I'll do when I RE is to roll the 401(k) into an IRA and I expect many "with it" folks do exactly this. May well be a good reason quoted average balances always seem incredibly low.
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Old 10-13-2009, 01:38 AM   #26
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OK.... this is an interesting quote

"There are people in the Obama Administration who are supportive of some kind of guaranteed system," says Dean Baker of the Center for Economic and Policy Research. "People should not have to shoulder the risk of a bad turn in the market."

(I added bold)....

So my question would be... who SHOULD sholder the risk of a bad turn in the market? And also, who should benefit from an unexpected good turn in the market?
You're right.

People don't have to shoulder the risk of a market downturn if they don't want to. They have the option of saving via safer vehicles such as CD's or a "Worry-fee Investing" approach. IIRC there are some members of this board who have taken those or similar routes. You might have to start earlier, save more and/or work longer, but you won't get bitten by a bear market.
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Old 10-13-2009, 04:09 AM   #27
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OK.... this is an interesting quote

..."People should not have to shoulder the risk of a bad turn in the market."

So my question would be... who SHOULD sholder the risk of a bad turn in the market??

Not people, apparently. Maybe animals? Plants?
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Old 10-13-2009, 08:45 AM   #28
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Excellent point, not thought about that. First thing I'll do when I RE is to roll the 401(k) into an IRA and I expect many "with it" folks do exactly this. May well be a good reason quoted average balances always seem incredibly low.
Agreed. Another point is that the 401K balances of people with good pensions are mixed with the ones who don't.

A low 401K balance is a retirement disaster for people without a pension, whereas a 401K or 403B plan may be an afterthought to someone who has a solid (and preferably COLA'd) pension waiting for them. So it's possible that the 401K balances of future pensioners are dragging down the average and making things look worse than they are.
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Old 10-13-2009, 09:44 AM   #29
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clifp, great letter, but I would like to point out that while there is "some" transparency in 401Ks, there are a LOT of fees and expenses on those plans. FINRA and others are looking at this, but the insurance lobby is pretty strong. The average 401K participant in a plan from Principal or hartford are paying about 2.5-3% a year, and folks never talk about that because noone knows about it, not even the PLAN SPONSORS.

I think a guy off the street has more financial literacy than 99% of the so-called "financial reporters"...............
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Old 10-13-2009, 09:50 AM   #30
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I see this more and more. "People are dumb, so the gov't needs to step in and save them from themselves."
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Old 10-13-2009, 10:22 AM   #31
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I see this more and more. "People are dumb, so the gov't needs to step in and save them from themselves."
True. And when government steps in to save them with money taken from us, then the dynamic changes and we (rationally) favor laws that restrict everyone's right to do the costly/"dumb"/unfavorable things in the first place. It's a self-perpetuating cycle of liberty reduction.

Seat belts, motorcycle helmets, retirement savings, health insurance . . .I think personal fitness/wellness is next.
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Old 10-13-2009, 10:57 AM   #32
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I have nothing against the defined contribution plan and like it's portability and the control it gives me. But their introduction at the expense of defined benefit programs was an effective pay cut for many people. The employer match in no way replaced the value of the defined benefit plan and that difference didn't appear in the employee's pay packet.

A non-contributory 401k plan or an equivalent increase in salary would have been fair. With wage stagnation, the reduction or elimination in 401k matches from employers and rising health insurance wage disparity is becoming unsustainable.
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Old 10-13-2009, 11:50 AM   #33
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The article (editorial) says that we need a privately-run plan that allows people to pay in a fixed percent of their salaries and get back a guaranteed monthly check.

That's easy. Any 401k plan can offer a TIPS fund. Any retiree can roll the assets at retirement into an IRA that buys a COLA'd life annuity.

The only problem with that plan is that people want a higher yield than approximately CPI+2.5%. But that's all the market yield you can get on a guaranteed investment. People want the yields from high-risk investments, but they want "somebody else" to bear the risk.

Most people on this board have figured out that you've either got to give up the yield or take the risk. Too many Americans haven't. So TIME can sell magazines by complaining about the real world.
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Old 10-13-2009, 12:22 PM   #34
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Most people on this board have figured out that you've either got to give up the yield or take the risk. Too many Americans haven't.
America, and the rest of the first world to a lesser extent, just consumes too much. We've been living on credit and off the backs of developing nations for too long. It worries me when I see countries like China, India and Brazil starting to follow the same pattern. Everyone just needs to save more and expect and spend less. Thrift is a guaranteed way to grow your money and with a lot less risk than many investments.
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Old 10-13-2009, 12:27 PM   #35
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That's easy. Any 401k plan can offer a TIPS fund. Any retiree can roll the assets at retirement into an IRA that buys a COLA'd life annuity. .
A TIPS *fund* provides no such guarantee of principal preservation plus a certain real return. Only individual TIPS held to maturity do that, and the option of holding individual TIPS is an option for very few 401K plan participants (and generally only those who have a brokerage option instead of being limited to a list of included funds).
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Old 10-13-2009, 01:14 PM   #36
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I also wonder if the quoted balances are per account or a total for a particular person. If someone has changed jobs several times and has 4 accounts with balances of about 50k each, does that get recorded as a 200k balance or 4 50k balances?

If they aren't correcting for that, their balance info is pretty useless.

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Excellent point, not thought about that. First thing I'll do when I RE is to roll the 401(k) into an IRA and I expect many "with it" folks do exactly this. May well be a good reason quoted average balances always seem incredibly low.
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Old 10-13-2009, 04:49 PM   #37
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A TIPS *fund* provides no such guarantee of principal preservation plus a certain real return. Only individual TIPS held to maturity do that, and the option of holding individual TIPS is an option for very few 401K plan participants (and generally only those who have a brokerage option instead of being limited to a list of included funds).
I understand that the fund doesn't gurantee market values. However, retirement savings might have 35 years from the time you buy till the time you sell. Over that time period, I'm assuming that the swings in market values aren't large enough to matter.

The last 3 years have seen quite a bit of TIPS fluctuations, but the highest and lowest prices of the Vanguard fund have been about 7% above or below a trend line. I'm figuring that's a pretty small variation if it's the end of a 35 year holding period.

Maybe more important, the price of a COLA'd SPIA is likely to reflect the current yield on TIPS. So what you give up to market value when you sell your fund is recovered in a lower price for the SPIA.

Maybe you've done the math, I haven't. It seems to me that the difference between a fund and individual bonds over that time period is pretty small.
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Old 10-13-2009, 06:49 PM   #38
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I have nothing against the defined contribution plan and like it's portability and the control it gives me. But their introduction at the expense of defined benefit programs was an effective pay cut for many people. The employer match in no way replaced the value of the defined benefit plan and that difference didn't appear in the employee's pay packet.
I, for one, am quite happy I started working just as 401ks replaced pensions. Maxing them out from 1983-2006 (and rolling them into stocks in IRAs) is the main reason I was able to retire at 48. I only had 4 jobs in my career (not bad for a programmer), but that would have chopped up any pension I would have earned (had they been offered) down to peanuts compared to the dividends from my IRAs.
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Old 10-13-2009, 07:18 PM   #39
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I, for one, am quite happy I started working just as 401ks replaced pensions. Maxing them out from 1983-2006 (and rolling them into stocks in IRAs) is the main reason I was able to retire at 48. I only had 4 jobs in my career (not bad for a programmer), but that would have chopped up any pension I would have earned (had they been offered) down to peanuts compared to the dividends from my IRAs.
I also maxed out on all available tax deferred avenues (mostly 401 K) during my working years (as did my wife) and so we were able to retire at 52, 7 years ago at the end of the prior bear market. The Time article indictment of 401K's on account of low balances is preposterous. Sure if you put little or no money in them there will be little to show at the end!
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Old 10-13-2009, 07:30 PM   #40
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I, for one, am quite happy I started working just as 401ks replaced pensions. Maxing them out from 1983-2006 (and rolling them into stocks in IRAs) is the main reason I was able to retire at 48. I only had 4 jobs in my career (not bad for a programmer), but that would have chopped up any pension I would have earned (had they been offered) down to peanuts compared to the dividends from my IRAs.
True! The benefit of NOT having a pension to look forward to is that we are all independent agents. Barring the 2-6 year vesting periods for some 401k matches, we can leave one employer and go to another for a quick boost in pay. Or move to a different industry for more money or better conditions.
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